Changes announced in the 2014 Budget mean retirees have more flexibility than ever when it comes to choosing how to spend their pension pot. Annuities are just one of those income-generating solutions, but do you fully understand what they are? According to research from Age UK Enterprises, a lot of pre-retirees don't.
The survey found that 42% of over-55s find pensions as a whole confusing, while 44% admitted that they didn't understand how annuities worked. This could make it a lot harder when it comes to planning their income in later life, particularly for those closer to retirement, and this is compounded by the fact that 85% of UK consumers find the financial services industry so complex they struggle to understand the products already available.
This is why seeking suitable advice is so important. Being able to generate an income will of course be vital to enjoy a comfortable standard of living throughout retirement, and independent advice – such as our no-obligation annuity planning service – could well be the first port of call.
This is particularly the case given the clear lack of trust in the financial industry. Those aged over-55 are the least trustful, with 21% admitting that this is the biggest barrier they face when it comes to dealing with their finances, while just 8% of consumers would turn to their bank or other provider if they didn't understand a financial product. A fifth (21%) find the jargon used to describe financial products too confusing, and it's the internet that's first turned to for those seeking advice (40%), while 15% would ask a friend or family member.
These findings are all the more concerning given the new flexibilities. Although 19% of those surveyed welcomed the changes, the fact that so few fully understand their options – or how those changes will impact them – means a lot could end up making poor decisions.
Gordon Morris, managing director of Age UK Enterprises, commented on the findings: "While many people have welcomed changes to the pensions industry and more of us are saving for the future through automatic enrolment into workplace pension savings, it is very worrying to find that so many are unsure about the financial products available to them, especially those approaching retirement.
"Taking control of your finances whatever your age, and especially at retirement, is vital but can only be achieved if people understand the financial services products they have, and those on offer to them."
What is an annuity?
We want to help you understand the complex world of annuities, so here's a quick overview of what they are. Quite simply, an annuity is a financial product that provides a guaranteed income throughout your retirement, by converting your pension savings into a regular income.
You use your pension pot to "buy" an annuity, or a regular monthly payment, that will last for the rest of your life, with the payments being pre-set according to the product you purchase. When you get a quote for an annuity you'll be given a rate, and it's this which will determine your income: for example, if you had a pension pot of £100,000 and were offered a rate of 6%, you'd get an income of £6,000 per year.
There are different types of annuity you can buy depending on your circumstances, such as an enhanced annuity if you have a medical condition, a joint life annuity if you want your partner to continue receiving income after you die, or an escalating annuity where your income rises every year.
There's a lot to think about before you take the plunge, and considering the number of options available and the complexities involved, it's vital you seek suitable advice. Purchasing an annuity will be the most important decision you ever make as it determines your income for the rest of your life, so don't go it alone!
If you're one of the many that are struggling to understand things, make sure to contact the experts. This is the best way to ensure you'll make the decision that works for you and your circumstances, giving you the income you need to live your retirement in comfort.
Compare annuity rates with our no-obligation annuity planning service.
Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.
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